Harrisburg's Failed Infrastructure Project

A new incinerator was supposed to earn Harrisburg, Pa., $1 billion. Instead, it’s a cautionary tale for what happens when an infrastructure project goes bad.

Standing atop Market Square Plaza, an 18-story skyscraper that opened in 2005 in downtown Harrisburg, Pa., former Mayor Stephen Reed surveys the city he built.

“That’s Harrisburg University,” he says, pointing north to an impressive 16-story building that houses the university he almost single-handedly created five years ago. Restaurants and bars stretch west to the state Capitol. Virtually every one was built on his watch. “Three-quarters of the lots on this street were vacant -- unused,” says Reed of one restaurant-filled artery. Vacancies lined many other streets too. Things were so desperate in Harrisburg when he took office in 1982 that on his first day as mayor, he found on his desk a plan for declaring municipal bankruptcy.

He ignored it and today Harrisburg is a city transformed. Upscale hotels, Class A office buildings, bars and restaurants fill the streets near the Capitol building. The old Holiday Inn, which was on the cusp of being transformed into a complex with a strip club on the bottom two floors and subsidized housing above, is now a Crowne Plaza, one of the city’s two convention hotels. Lawyers and lobbyists occupy the historic federalist townhouses that look out over the Susquehanna River. Bicycle-riding hipsters and state employees walking to work share the narrow sidewalks of the historic district. The renaissance is Reed’s legacy.

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Yet despite the outward signs of prosperity, all is not well in Harrisburg. Last year, after 28 years as mayor, Reed was turned out of office. Several things contributed to his downfall, among them a rising dissatisfaction with Reed’s autocratic management style and an economy gone sour. But what really doomed Reed’s bid for an eighth term in office was an infrastructure project gone bad.

In 2003, the Harrisburg Authority, a public entity charged with providing solid waste management services and whose board was handpicked by the mayor, approved a plan to retrofit Harrisburg’s incinerator for $120 million. Today Harrisburg, a city of about 49,000, owes more than $280 million on the project and has amassed a per capita debt burden more than three times the second most indebted city in the state, Philadelphia.

Harrisburg isn’t alone in piling up debt. Over the past five years, state and local governments have been on an epic borrowing binge, bringing outstanding debt to a formidable $2.4 trillion -- that’s a 35 percent increase since 2005.

There’s nothing inherently wrong with borrowing money, particularly to build infrastructure. Done properly, it’s one of the best tools governments have to boost productivity and by extension, raise incomes. Done improperly, there’s no better way to destroy a balance sheet. And that’s where Harrisburg is today. Pennsylvania’s capital is teetering on the edge of bankruptcy, a prospect that has spooked bond markets and worried Gov. Ed Rendell, who recently warned that “If Harrisburg fails, every other municipality in Pennsylvania is in danger.”

The story of Harrisburg’s debt-driven downfall is a cautionary tale of how a city -- even one run by a mayor who considers himself a builder -- can fall prey to the vagaries of a large-scale project. It also raises provocative questions about the context in which key decisions are made: Is Harrisburg the victim of fraud and malfeasance? Or is it the victim of a political climate so poisonous as to make problem solving impossible?

Harrisburg Gambles on a Resource Recovery Facility

For more than three decades, the city incinerator’s lone smokestack has stood in the center of south Harrisburg. Technically it’s not an incinerator at all, but a waste-to-energy resource recovery facility that burns garbage and uses the heat released to generate electricity. When it opened in 1972, the plant was seen as a way to convert what is a municipal expense -- garbage disposal -- into a profitable product -- electricity. But the project seemed troubled from the beginning. Breakdowns were frequent. Tests established that the dark plumes of smoke that occasionally wafted over the city were rich in mercury and dioxins, two highly toxic materials. By the time Reed took office, the incinerator was actively losing money.

Reed managed to stabilize operations and return the incinerator to the black by bringing in more professional management. In the early 1990s, the city sold the facility to the Harrisburg Authority. Doing so provided a cash infusion into the city coffers and moved the politically sensitive task of raising trash disposal rates out of elected officials’ hands. But the incinerator soon encountered a new problem -- more stringent emissions standards of the newly amended Clean Air Act. At first, the city scrambled for a loophole: It sought to be “derated” by reducing its burn rate to no more than 500 tons a day. But one of its two boiler units continued to struggle to meet U.S. Environmental Protection Agency dioxin guidelines. In December 2003, environmental regulators shut the facility down until standards could be met.

Local environmentalists, worried about the potential health problems associated with the facility, argued for leaving it shuttered. But there was a problem with that approach. The city still owed $104 million on it. As a result, the city’s elected leaders faced a choice. They could shutter or sell the facility at a loss, a course of action that would cause city leaders budgetary pressures. They would either have to reduce spending or increase taxes. Or they could double down on the incinerator, issuing $120 million in new debt to retrofit and expand the facility in order to generate new revenues that would cover both the old and new notes.

The city decided to double down.

In 2004, the Harrisburg Authority awarded the contract to retrofit the incinerator’s two existing boiler trains and build a third unit to Barlow Projects Inc., based in Fort Collins, Colo. Barlow Projects had developed a patented boiler and stoker technology that minimized moving parts (a common cause of breakdowns) and provided innovative pollution controls. But what made Barlow’s offer most compelling was its price: The company was willing to build the new facility for $77 million -- about one-third less than other major players in the industry.

To Reed, Barlow checked out. True, it had never built a project as large as the one Harrisburg envisioned, but the company had a good track record with smaller projects. Its founder and CEO, James Barlow, an electrical engineer and ordained minister, was a man of impressive conviction. Engineering firms hired by the city, authority and county signed off on the technology and certified it at that price, modernizing the incinerator and expanding its capacity would cover the note’s costs.

Not everyone was smitten with Barlow’s offer. Fred Clark, a Reed protégé and a member of the Harrisburg Authority, was worried by the low-ball bid. “It was $40 million less than the other bids,” says Clark. “You don’t have to be a rocket scientist to think, ‘What the hell?’”

Another Reed protégé, newly elected councilwoman Linda Thompson, who is now Harrisburg’s mayor, was worried too. When the Harrisburg Authority went to the City Council with a request for the city to guarantee a $120 million bond for the retrofit, Thompson hesitated. Ultimately though, Barlow’s bid seemed to offer the only affordable way for the city to proceed. “I kept coming to the conclusion that there was no way we could pay for this, particularly if we had to ask the taxpayers to pay for it,” Thompson says.

In short, Harrisburg’s residents were simply too poor to pay a higher price. If the plant cost more, the authority wouldn’t be able to pay off the note. So despite her reservations, Thompson joined five of her seven colleagues on the City Council in voting “yes.” The county signed on too, as a secondary guarantor for some $95 million in debt. Responsibility for overseeing the retrofit fell to the Harrisburg Authority and its five-member board. But de facto responsibility resided with the mayor, who appointed all of the board members.

By 2005, Reed had become the capital’s indispensable man, the Richard Daley of Harrisburg. But the arbitrary nature of his reign was put on display when Reed used Harrisburg Authority money to purchase items for a rather exotic economic development initiative: a Wild West museum that would include a replica of Tombstone, Ariz., on the day of the famous shootout at the OK Corral. Unbeknownst to the public, Reed had spent more than $7 million purchasing such items as the gates of the OK Corral and gambler Doc Holliday’s dentist chair for the museum, using funds provided by the Harrisburg Authority. But even such extravagant rule bending failed to dent Reed’s popularity or reputation for competence. A May 2005 editorial in the local Patriot-News described Reed as “practically a legend in his own time” and asked where Harrisburg would be “without the juggler in chief?”

Meanwhile, the incinerator retrofit was falling apart.

The Missing Performance Bond

There are numerous ways state and local governments seek to ensure that contractors perform their work correctly on large infrastructure projects. One is to hire a project manager. Unfortunately for Harrisburg, Barlow Projects was its own project manager. From the beginning, it struggled to oversee local subcontractors and manage a project far larger than any it had ever done before.

Another means is to write a contract that fines companies for failing to meet deadlines. Harrisburg’s contract with Barlow included provisions of this sort, but there was a problem the city had not anticipated: The company was too financially shaky to pay such fines.

A third provision is to withhold a retainage fee, typically 10 percent of the total cost of the project, until the job is completed. The Harrisburg Authority’s contract included a provision that left $7 million in its hands. But in late 2005, the authority released the money to the struggling company as part of a desperate effort to help it complete the project.

A fourth provision that most municipalities insist upon -- and probably the most important -- is for a performance bond, which protects against loss in case the contract’s terms aren’t filled. It was here that the Harrisburg project went terribly wrong. Barlow didn’t qualify to be bonded.

Rather than stop the process altogether, city officials and the authority devised a workaround. Instead of a performance bond that a bank or insurance company would guarantee up to the bond limit in the event of a default, the city cobbled together a series of less impressive guarantees.

According to Thompson, the City Council never knew the performance bond was missing. “Countless hours of tapes prove that the council went through very intensive public hearings,” she says. “How that got away from us is mind-boggling to me.” But Clark says the lack of a performance bond was something discussed, and that even though the city’s legal counsel OK’ed it, it should have been a red flag. “It didn’t have a performance bond, ‘Hello!’” he says.

By late 2006, the project’s construction was not going well. On-site problems at the incinerator could no longer be ignored. That December at Reed’s behest, the board voted to fire Barlow Projects and bring in a major national player, Covanta Energy, to take over the project. When the Covanta team arrived at the site, it was shocked by what it found.

“I don’t want to say I was scared,” says Covanta Vice President Jim Klecko, “but I had reservations about physically going through the facility.” Streams of water flowed through the facility, amidst piles of ash. Worse of all, the all-important third boiler had been “completely scavenged” to maintain the two existing boiler units. The third boiler was the linchpin of the plan to pay the note by expanding burning capacity from roughly 530 to 800 tons a day. But with the third boiler incomplete, the facility was operating at about two-thirds capacity and losing roughly $1 million dollars a month.

Rather than address the problem, the City Council and mayor went to war.

Indentifying the Root of the Incinerator's Failure

To Reed, the failure of the incinerator retrofit was a regrettable but unforeseeable engineering failure. When asked, “What went wrong?” Reed demures, saying, “to this day, I must tell you candidly, I have yet to hear a rational explanation.”

The City Council, led by Thompson, who later became the council president, and then-Councilmember Dan Miller, identified a different root problem -- the mayor’s leadership style. To Thompson and Miller, Reed had built a house of cards. “Everybody was so impressed with the new buildings and additional restaurants, and the excitement in the main downtown corridor,” Thompson says. “No one was checking the facts.”

In January 2007, the City Council, acting on a legal opinion provided by the city solicitor, passed a resolution that stripped the mayor’s authority to appoint the Harrisburg Authority’s board. Reed vetoed the measure, but the following month, another councilmember came over to the majority, providing a veto-proof majority. A new board was installed. Reed sued. Three years of legal battles followed, which led to the seating and unseating of several boards. (Earlier this year, the state supreme court finally ruled in the mayor’s favor.)

Meanwhile, Reed was trying to solve the problem. As a step toward paying off the incinerator debt, he proposed leasing the city-owned garages downtown (which serve state government agencies) for 75 years, a step that would have netted the city around $100 million. The City Council rejected the measure out of hand. Nor could the mayor and council agree on a new board for the Harrisburg Authority. What had been an engineering project management failure became something more serious -- a political debacle.

In February 2009, Thompson announced that she was running for mayor against Reed. Emboldened by 3,000 new voters who had registered one year earlier to vote for President Barack Obama, and by a skillful campaign that targeted Harrisburg’s ministers and African-American majority, Thompson won the Democratic primary. With a 4-1 Democratic-to-Republican advantage in voter registration, Thompson’s election should have been ensured. Instead, she defeated the Republican candidate, a lobbyist, by just more than 800 votes.

As mayor, Thompson slipped with alarming speed into the same groove that had frustrated her successor. An early attempt to sell or lease assets and raise property taxes and water rates was rejected by the City Council. After Thompson vetoed the council’s modified version, the budget reverted to what Reed had proposed instead. The City Council expected the mayor to return with a new plan after her initial rejection. She didn’t. The city then hired a consulting firm to prepare a detailed plan that outlined the city’s options, which went nowhere. Soon councilmembers were openly questioning the new mayor’s ability to do the job. It was a skepticism that the mayor herself sometimes seemed to share, noting on at least one occasion, “This is above my pay grade. It’s above the City Council’s pay grade or the controller’s pay grade too.”

Meanwhile, the debt payments keep adding up. Harrisburg owes $34 million on Dec. 14. For the past year, however, the city and authority have failed to make payments on the $288 million debt, and that has forced its other guarantors, notably Dauphin County and bond insurer Assured Guaranty Municipal Corp., to make millions of dollars in payments on its behalf. Earlier this fall, Dauphin County commissioners, furious about Harrisburg’s failure to craft a solution to the crisis, authorized Assured Guaranty Municipal to file a lawsuit against the city.

A majority of Harrisburg’s City Council has reacted with defiance, criticizing Wall Street for lending Harrisburg “excessive” sums of money. So dysfunctional has the relationship between the mayor and City Council become that when the state offered to provide the mayor with $850,000 to hire financial consultant Scott Balice Strategies to advise the city, the City Council rejected the money, infuriating Rendell. In an appearance with Thompson after the vote, Rendell, the man who saved Philadelphia from fiscal failure in the 1990s, attacked the City Council for saying that an outside consultant would want to pay off bondholders first.

“That’s what cities do,” Rendell said, in a hastily called press conference. “They borrow money, and they meet their obligations: They pay off the bondholders. If you don’t do that, a city will have no long-term or short-time viability. The city will crumble.”

Indeed, one of the most notable things about Harrisburg’s crisis is how little pain the city has endured. Trash disposal rates have been raised. At $200 per ton, they’re now considerably higher for the city than the county. But property taxes haven’t gone up, service cuts have been slight and no assets have been sold. And yet, the city owes bondholders more than it can afford to pay. The original $120 million project has ballooned to more than $280 million in debt, thanks to the $104 million the city already owed on the old incinerator, $25 million for the new operator to complete the incinerator and an additional $31 million that was borrowed to pay maturing debts and restructure some of the remainder.

A declaration of bankruptcy is one talked about solution to the debt problem. As Thompson sees it, that ought to be “our last option,” and she’s criticized the City Council for treating it as a first option instead That ultimately may be Harrisburg’s true tragedy. The incinerator’s problems are the result of bad choices and bad luck. But the problem’s persistence has been caused by poor leadership, including an unwillingness to confront citizens with the reality of the problems Harrisburg faces.

“With [Reed] going down, no one knows how to deal with politics in Harrisburg,” says former Councilmember Dan Miller, now the city controller. “He was it. He was the kingmaker.”

Sitting in his office off Front Street in the upstairs parlor of a historic home where both former President Abraham Lincoln and Confederate Gen. Thomas “Stonewall” Jackson once slept, Reed sits, wreathed in cigarette smoke. Shades are drawn as Reed, dapper with a pencil thin mustache and wearing an enormous, diamond-encrusted Mason ring, shakes his head in disgust. “Yes, it is frustrating,” he says of the city’s plight and the criticism directed at him. “But I have moved on.” As for the criticism that the closely held way in which decisions were made under his tenure contributed to the problem, Reed dismisses it out of hand.

“Closed door?” he says in response to a question about his management style. “I wouldn’t say closed door. ‘Autocratic’ would be the word. It’s an autocratic style based on a certain level of impatience. I am not one who is fond of, ‘let’s have formal committees and study this problem for the next three years and let’s have a hundred people serve on this committee.’”

Reed may not be dwelling on the enormous financial problems wrought by the failed incinerator project -- or on the breakdown in government that has thus far prevented Harrisburg from addressing the issue -- but the rest of the city is. Along with his many accomplishments, these too are Reed’s legacies.

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